Lecture 4. Converting a budget into a cashflow
A budget contains a set of totals and provides a way in which you, your colleagues and partners can see the totality of what is entailed in the project.

However you cannot manage a live project with simply a set of totals. Indeed you can’t really finalise a budget without working out when the money will be spent because there are times when you spend money before the income arrives and you therefore have to work out how such bills will be paid if the project account is empty!

InTemplate 1 - budget and cashflow you will find a second sheet in the workbook where you will see that you can take the total amount in the income/cost row and allocate it across a 12 month period. Feel free to change this. If you want to work in weeks or quarters rather than months please do. If your project will run over more than one year please add in new years.

Once you have the right time period running from left to right across the sheet your next task is to work out when each piece of income or cost will happen in this timeline. To do this accurately you might need to add in more rows under the key headings so that you can separate out for example a set of staged payments to artists being commissioned.

You should also consider whether there will be a time delay between issuing or receiving an invoice and the date on which it is paid. For example if a company sends you an invoice say for some equipment you are hiring there may be a 30 day credit period. So if they invoice you on the 1st of the month they do not expect to receive payment until the 30th of the month.

If you are funding the project via grants you need to establish whether the funder is paying in advance or in arrears? If the money is transferred to your company as soon as the award is made then they are paying in advance of the delivery. If, as with many EU funded projects your organisation makes the grant claim during or after the project then you are being funded in arrears i.e. after the costs have been incurred. This has a fundamental impact on the cashflow!

So if the activity of budgeting is working out what and how much the income and cost will be then the activity of preparing a cashflow is answering the question of when this money will flow in or out?

Things to check in your cashflow and documents to compare your cashflow to:

  • Does the total in the budget match the total amount you’ve allocated across the timeline of the project?

  • Have you accounted for any possible delays in receiving money or paying it out?

  • Are there times when you are running ‘in the red’ ie where the expenditure exceeds the income?

  • If you are ‘running in the red’ then how will you pay these bills? Have you agreed this in the organisation?

  • Do the contracts with suppliers in terms of when monies will be received or paid match the cashflow you have prepared?

  • Have you agreed with a funder or in your organisation what paperwork is required as proof that the money has been spent and have you stipulated this in your contracts with suppliers?

  • Do your contracts state who is liable if costs are incurred but deliverables are not received and does your contingency budget cover any of this? If not are you appropriately insured?

1. What to do if your cashflow predicts you’ll go into the red?

It is not automatically a bad thing for a project to go through a period of incurring costs which exceed the income. It does however require planning.

Lets take an example where a dance company wins a grant of £50,000 to deliver a project over a 12 month period. This money will be paid in three instalments - £15,000 at the start, £15,000 in the sixth month and £20,000 upon completion i.e. in month 13 as the project completes in month 12.

The total project costs have been budgeted at £55,000 as the dance company is expecting to sell £5,000 worth of tickets.

The challenge to the project leader is that they are expecting to pay out £40,000 in costs by the end of month 11 but will have only received £30,000 of the grant by this time and even if they can pre-sell all their tickets (£5,000 worth) they will still be £5,000 in the red. If they don't pay the bills by the end of month 11 they risk the dancers not being willing to perform without payment which would put the whole project in jeopardy. What can they do about this?

Well the good news is that in the cashflow forecasting this challenge has become visible so it is known to the project manager and senior management team before the project starts. At an organisational level the senior management team can work out with the finance director whether they have sufficient funds in their other accounts to be able to cashflow this gap internally or whether they need to either negotiate a different payment schedule with the funder or obtain loan finance from their bank to cover this gap. If the organisation decides that they need a loan then the cost of the interest that the bank will charge them should be added to the project costs before finalising the budget with the funder!

So now you can:

  • Plan for the points in time when money will be received or spent

  • Make staged payments on a contract to reflect the stages of work completed

  • Evaluate whether your project will go into the red and if so make plans to cover this cashflow hole

  • Work out who is liable for costs that are unplanned or over-budget and sort out the details in the contract before you get started

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